COOLING EFFECT OF PULSE IMPORTS

ON PRICES: THE CASE OF PIGEON PEA

IN INDIA

January 14, 2014

New Delhi

Devesh Roy

Akanksha Negi

India -largest producer and consumer of pulses in the world (FAO,

2008).

Yet, India’s pulse production- consistently inadequate in meeting

the rising demand.

▫ Subpar pace of increase in production : production fluctuating

between 11 and 14 million tons annually.

▫ Evolving demographic dietary patterns.

▫ Pulses, nutritionally important crop: Dominant sources of plant

based proteins in traditional vegetarian Indian diet.

▫ Heterogeneity in pulses intake: function of tastes and

preferences (amongst other things).

▫ Persistently high prices: result of demand outpacing supply both

on an aggregate level and across variety.

Scenario of Pulses in India

Research Question

Price evolution of pulses

11:00 AM

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MSP over time (recent data- bit

slower growth in MSP)

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URAD

Moong

Tur

Unit value of Import vs MSP Unit value (import) Rs/T MSP Rs/T MSP as % of import value

2009-10 2010-11 2011-12 2009-10 2010-11

2011-12 2009-10 2010-11 2011-12

Peas 15663 15033 20265 0 0 0 0 0 0

Chickpeas 25102 25049 37094 17600 21000 28000 70 84 75

Moong/Urad 44795 53450 41941 27600 31700 44000 62 59 105 Lentils 37566 37754 30861 18700 22500 28000 50 60 91

Tur (Arhar) 42551 33177 30709 23000 30000 38500 54 90 125 Others 38533 48004 36885 - - -

Total pulses 28343 27044 27028 - - -

Import of Pulses Qty in Lakh MT

2009-10 2010-11 2011-12

Peas 16.56 15.05 20.23

Moong, Urad, Massor,

others

13.66 8.26 8.38

Tur 3.89 3.46 4.26

Chick peas 3.38 1.01 2.03

Total pulses 37.50 27.78 34.91

Primer on pulse prices

Low weightage to Pulses vis-à-vis cereals and animal source foods e.g. Milk in Wholesale Price Index.

Experiencing high prices post 2005.

Hypothesis: Under rising prices, Imports cool down domestic prices.

Examples:

Massive wheat Imports- to the tune of 6 million tons.

Liberalization of Edible Oil Imports

Stop gap allowance for Imports -Milk, Sugar and Onions.

Steady growth in Pulses Imports since 2000: Growing up by as much as 36 percent

Evolution of Pulses Imports coinciding with persistent increase in prices: To what extent have imports cooled domestic markets?

This paper is an attempt to fill in this gap in the literature.

Pulses in price index

Year High Inflation Low inflation

High weight Low weight High weight Low weight

1998 7 types of edible oil

Masur (11.6,0.3)

Rice, wheat Other coarse cereals

Arhar (29.5, 0.6)

Moong (11.1, 0.4)

Sugar Urad (4,0.5)

Milk Some fruits and vegetables

Gram (1.9,1.6)

Green pea (-21.4,0.5)

Onions Gur/Khandsari

Bajra

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Pulses in price index

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Pulses in price index

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Pulse in price index

High inflation Low inflation

High weight Low weight High weight Low weight

2010 Fish Moong Rice Masoor

Milk Urad wheat

Sugar Gram

Arhar

Green Peas

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Why Pigeon Pea –Home Scenario

• One of the major pulses in India alongside Chick Peas, Black Gram,

Green Gram and lentils.

• India accounting for 90% of total global area and 93% of world

production (FAO, 2009).

• What happened to Pigeon Pea prices?

▫ The retail price of pigeon pea reached as high as Rs 120 per kg and other

pulses remained above Rs 70 per kg for more than six months (Reddy,

2009).

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Data and Variables

Time Period: 2002-2012

Data Sources ▫ Imports: Customs Dataset

▫ Wholesale Price Index (WPI): Office of the Economic Advisor, Ministry of Commerce an Industry.

http://www.eaindustry.nic.in/

Variables: ▫ Weekly Imports (in constant million USD)

▫ Weekly Wholesale price index (WPI)

We use variables in their log transformations for technical reasons.

Data

Presentation of variables: 2002-2012

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Pigeon Pea

New long run

Equilibrium?

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Some Other Cases: Black Matpe, Chick Pea

Lentils, Peas

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Some other cases of persistent import

penetration

• Edible oils

• In other cases more stop gap role of food imports in

India – case of sugar, milk, vegetables

• how does it differentiate the cooling effects of

imports on prices?

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Generically, what do we do?

• Conduct an analysis of the cooling effect of imports on prices of pulses.

• need a mapping between the imported item and its counterpart in the domestic price data.

• Pigeon pea one of the pulses where can be direct one to one mapping.

• Mapping realized using a novel approach of employing the customs data disaggregated at 8 digit level.

• Several details in customs data but importantly allows date of imports. Only upon dating, we can match high frequency imports with similar frequency of price indices.

• Cooling effect is an issue that extends to several other commodities with import penetration

11:00 AM Research Question

Vector error correction model

∆𝑙𝑛𝑀𝑡 = 𝑣𝑀 +∝𝑀 𝑧𝑡−1 + 𝜏𝑖∆𝑙𝑛𝑀𝑡−𝑖 + 𝜑𝑖∆𝑙𝑛𝑃𝑡−𝑖 + 𝜖𝑀𝑡

3

𝑖=1

3

𝑖=1

∆𝑙𝑛𝑃𝑡 = 𝑣𝑃+∝𝑃 𝑧𝑡−1 + 𝛿𝑖∆𝑙𝑛𝑀𝑡−𝑖 + 𝜋𝑖∆𝑙𝑛𝑃𝑡−𝑖 + 𝜖𝑃𝑡

3

𝑖=1

3

𝑖=1

with 𝛽′ = (1, −0.365), ∝ = −0.357, 0.021 , and 𝑣 = (0.0001, 0.0013)

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The long run dynamics between Import and Prices are captured by the cointegrating equation:

𝑙𝑛𝑀𝑡 = −0.566 − 0.365𝑙𝑛𝑃𝑡

Stationarity

• Both the series are non-stationary • stationary time series-never wanders too far from the mean.

The effect of errors decay and disappear over time. Things that happened recently relatively more important than things that happened a long time ago.

• non-stationary time series- time series that eventually explodes. Things that occurred a long time ago have large impact compared to things that occurred more recently

• (random walk if moves up and down)

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Impulse response function • Rather than seeing serial correlation as technical violation of an

OLS assumption, modern view is:

▫ serial correlation as a potential sign of improper theoretical specification

• leads to ‘dynamic’ regression models i.e. inclusion of lagged (dependent and independent) variables.

• Greene (2003)- Impulse and unit response functions in time series models- counterpart - marginal effects in cross-sectional setting.

• Imagine models in equilibrium. An IRF is when the independent variable goes up 1 unit in one period and back to 0 next period.

• unit response function - when the independent variable goes up 1 unit and remains up one unit for all remaining periods.

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Salient findings

• coefficient of prices in the equation is statistically significant implying

imports and prices are related in a negative way.

• The error adjustment by imports in the current period=-0.36- Imports fall

rapidly when away from equilibrium.

• Prices display a somewhat lukewarm adjustment mechanism imports are

flexible whereas prices tend to be sticky in the short run.

• Second since data on imports and prices at a very high frequency, imports

behaviourally tend to be more volatile compared to prices.

• Both the adjustment coefficients significant at 1% level.

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Impulse: Prices

Response: Imports

Impulse: Imports

Response: Prices

Impulse Response Functions

Take away from impulse responses

• A unitary shock in Ms is associated with a sustained

increase in prices until 20 weeks after which it

stabilizes to a constant impulse

• Is it imports heating markets?

• Not really look at the rate of price change – it

decelerates

• Imports might be cooling by suppressing rate of price

escalation

• There is catch up at half yearly level

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Take away from impulse responses:

Continued

• Imports bear on levels of prices with a lag

• Imports bear on price growth comparatively

• Imports have not super-cooled the pigeon pea

markets i.e. have not immediately brought clam in

markets

• Could it be the dominance of intensive margin in

pigeon pea imports?

• Action on extensive margin would it make the

outcome better?

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Are Prices causing Imports or Imports

causing Prices?

• Granger Causality: In a bivariate setup, X is said to granger

cause Y if controlling for the past values of Y, lagged values of

X are instrumental in predicting current Y realizations.

• Not a real causality but one leading to another

• No prior basis to assume whether imports granger cause prices

or vice versa.

• In the present bivariate setup, its hard to say conclusively

whether imports are granger causing prices or vice versa.

• This ambiguity has information

• Prices and imports seem to be intertwined as theory and

observations would suggest

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Bi-directional causality has important

message

• Prices may have induced imports

• Imports itself might bear on prices through different

channels such as consumer response, agent’s

expectations

• Economic phenomenon often show such bi-

directional relationships

• E.g. stock prices and exchange rates in India (Kumar

2009)

• Implication- realize the intertwined nature of imports and

domestic prices

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The other side

• Imports do respond to price shocks

• Is it timely and is it enough

• May be not

• On either side five to six months span seems focal

• Imports take time and will be so unless more

consistent trade relationships become norm i.e. are

bootstrapped

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Take home messages for policy • Imports and prices are intertwined need to be

considered in conjunction

• Clear evidence of imports and prices co-movement

• Roughly imports’ role in cooling pulse markets

reflect the reactionary stance rather than a pro active

disposition

• With status quo in trade policy it can only be

protracted cooling of markets

• Expansion on the extensive margin might speed

things up

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